How Freeport Reached a Mining Deal in Indonesia

By Reuters

Aug. 25, 2014

JAKARTA, Indonesia — As negotiations to resolve an increasingly bitter dispute over Indonesian mining rules teetered on the brink of collapse, the chairman of Freeport-McMoRan, James Moffett, flew to Jakarta for last-ditch talks.

Indonesia’s chief economics minister, Chairul Tanjung, said he had gotten to a point where he felt that only talking directly to Mr. Moffett, 76, might break a deadlock in the six-month dispute, which had already cost Indonesia, Southeast Asia’s top economy, more than $1 billion and put thousands of jobs at risk.

In less than two hours in early July, the two men reached an agreement, setting the stage to resume exports and restore badly needed government revenue to Indonesia.

“I just convinced him that this was the maximum the government can give,” Mr. Tanjung said in an interview. “He believed me, I believed him, and we shook hands. Very simple.”

Mr. Tanjung, one of Indonesia’s richest businessmen, was appointed minister in May and made reaching a deal to get mining exports going again a priority to revive an economy suffering its sharpest slowdown since the global financial crisis. But a looming presidential election made it harder to reach a politically unpopular compromise with foreign miners.

Aside from any chemistry between the two businessmen, the breakthrough came because Mr. Moffett took a more flexible approach, Mr. Tanjung said.

The dispute with Freeport had centered on its refusal to pay an increasing mineral concentrate export tax and its bid to extend its mining contract.

The meeting was attended by only a small number of Indonesian officials and Freeport, and according to Mr. Tanjung, the solution was to focus on what the two could agree on to get exports restarted and set other issues aside for now.

Freeport agreed to make a $115 million down payment for a smelter, pay higher royalties and divest more of its Indonesian unit. Indonesia in return substantially cut the concentrate export tax for Freeport and other miners building smelters.

Mr. Moffett is a likable and larger-than-life Louisiana businessman, known for his Elvis impersonations during lighter moments, but also a shrewd deal maker. Starting his career as a wildcat prospector in Louisiana, Mr. Moffett founded McMoRan Oil & Gas with two of his partners in 1969 and put together the merger with Freeport 12 years later.

With a 47-year history in Indonesia, Freeport’s fortunes were transformed by the discovery of the Grasberg mine in Papua, one of the world’s biggest deposits of gold and copper. Helped by Mr. Moffett’s ties to the late autocratic president, Suharto, Freeport won the right in 1988 to mine Grasberg, which has been a lightning rod for grievances over its effects on the environment, security arrangements and revenue sharing.

The recent talks did not touch on Freeport’s links to the Suharto family or environmental issues, said Sukhyar, director general for coal and minerals at the ministry, who played a role in the negotiations and goes by one name.

In January, Indonesia introduced a mineral ore export ban and the increasing tax on metal concentrate shipments in a bid to force miners to process raw materials to lift their value. But the tough measures in some cases backfired, as miners such as Freeport and Newmont Mining said the rules breached their contracts and exports stopped.

The stakes were high on both sides. The Grasberg complex in Papua provided about a fifth of Freeport’s global revenue last year. In Indonesia, the company employs 24,000, including contractors, and is one of the country’s largest taxpayers.

Freeport believed the new mining rules, particularly the export tax, violated its contract. The company refused to pay the tax and invest in a copper smelter unless the government provided assurances it would be allowed to continue operating after its contract expired in 2021.

Freeport wanted certainty to spend more than $15 billion to build what would be the world’s biggest underground mine, while the government said it could not renegotiate until 2019, two years before the contract expires.

Freeport Indonesia’s chief executive, Rozik Soetjipto, said the breakthrough came when the new minister arrived with a business background. “He understood that it is impossible for a company to continue such huge investments if there are no legal guarantees for the long-term continuation and fiscal certainty,” he said.

A trained dentist, Mr. Tanjung, 52, was ranked as Indonesia’s fifth-richest man by Forbes, with a net wealth of $4 billion. His company, CT Corp, now operates two of the country’s top five TV stations and has retail and banking interests.

Freeport sent its chief executive, Richard C. Adkerson, to Jakarta in June to focus on negotiating a deal. Despite weeks of talks, which included meeting at a Jakarta hospital after a senior negotiator fell ill with dengue fever, the two sides remained deadlocked.

Requests for comment from Mr. Moffett and Mr. Adkerson sought through a spokesman at Freeport’s head office in Phoenix were declined.

An emailed statement said: “The company and its executives have sought to engage in constructive discussions and to maintain good relations with Indonesian officials including the president, ministers, parliamentary representatives and local officials of each respective administration.”

By the end of June, talks were at a breaking point and some were questioning whether Freeport had a future in Indonesia.

At the private meeting in Jakarta in early July, Mr. Tanjung and Mr. Moffett agreed to leave the most contentious issues over contract renegotiations to the next government and instead focus on getting exports restarted.

Mr. Tanjung said he felt he needed to bring Mr. Moffett in because “as a chairman you can see a bigger picture.”

The final step left was for the cabinet and President Susilo Bambang Yudhoyono to approve a memorandum of understanding between the government and Freeport, though the unfolding presidential election delayed ratification and there were concerns the deal could still fall through.

But finally indicating an end to the almost seven-month dispute, a shipment of 10,000 tons of copper concentrate left Indonesia for China on Aug. 8.